Office market braces for possible hedge fund trouble

By TRD | November 04, 2007 09:46PM

As the season for investors to redeem their investments in most hedge funds kicks into gear, some commercial real estate brokers are bracing for any effects on the Manhattan office market.

Most hedge funds have redemptions at the end of the year and require 30 to 60 days notice, hedge fund managers said. That means that starting yesterday many investors could remove their money if they’re unhappy with the hedge fund’s performance. After the required waiting period, many investors could be pulling out money from funds by Dec. 31, said Ian Green, manager and founder of the hedge fund Pendragon Capital Management.

That could have repercussions for the high-end office market, which is driven by hedge funds and other tenants in the financial service sector. Hedge funds are concentrated in The Plaza District, the pricey Manhattan submarket centered around The Plaza Hotel. Brokers say some of the most popular buildings for hedge funds are 399 and 450 Park Avenue, 520, 527, 535 and 540 Madison Avenue, 712, 717 and 767 Fifth Avenue, Carnegie Hall Tower and the Seagram Building at 375 Park.

The funds often take smaller, elegant spaces that average about 2,000 square feet, according to commercial brokerage Cushman & Wakefield.

While most commercial real estate brokers declined to talk about any potential exodus of capital from the funds, some brokers said they were watching closely.

“Historically — and I think it is on peoples’ minds — the redemption season sometimes prompts more space to come on the market, especially sublease space,” said Robert B. Emden, a principal at PBS Real Estate, a boutique commercial real estate services firm. “Or, in some instances, if it’s a small hedge fund, and they can’t support their rent, they’re going to give it up and move to much smaller quarters.”

Or the hedge fund might disappear altogether. That happened with Xerion Capital Partners, a hedge fund focusing on investments in distressed credit that was acquired by the boutique investment bank Perella Weinberg Partners in early October. The hedge fund’s founder and managing principal, Daniel J. Arbess, joined the boutique investment bank as a partner.

“There are smaller funds that have sold their assets …because they recognize it’s a challenging game for them today to play in,” said Alexander Chudnoff, an executive director with Cushman & Wakefield.

Still, a vacated space like Xerion’s at 450 Park Avenue doesn’t sit empty for long, he said.

“If a smaller fund gives up space, it’s gone in days,” said Chudnoff, who handles several hedge fund clients. “There’s still so much momentum coming out of the prime brokerage houses, and there are just so many people on the street who are starting new funds that you can see the space move unbelievably quickly.”

While the demand for the luxury office space that hedge funds typically crave remains high, landlords are starting to look for more security when they lease to financial service tenants, Emden said. Landlords “may be a little bit more cautious now,” he said.

Even if there have been some smaller funds in the $200 to $500 million range that have had redemptions called, Chudnoff said that he didn’t anticipate any mass exodus of capital from hedge funds. He said that 60 percent of the world’s fund money under management is in New York City, which has thousands of hedge funds, including the world’s three largest.

“We’ve seen tremendous growth continuing in the sector,” Chudnoff said.